E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest - Transcripts
April 30, 2022
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0:00 Bestie intros 4:32 Understanding VC fund metrics that matter, state of private markets 29:37 Recession possibilities, Q1 negative growth 44:56 Student loan forgiveness, fixing the underlying system, solutions 1:09:52 Archegos founder Bill Hwang...
Transcript
is there going to be an open mic
night in? We
were going to have you speak
friedberg, but we
really feel like you're not
capable. So we
want to be entertaining.
That's not personable, freed you
guys are missing out.
I'll tell you guys what makes my stand up comedy so good God, Here we go. Oh my God, we're back on this,
jesus christ. It's
my creative sensibility. So if I have some time to
prep and
write my script
and read
my own creative
insights, okay, bring
one joke next week for all the time we've spent together on this
podcast. You know, so little about me.
It's so, it's so
depressing, I gotta be honest.
Well, you know, here's the thing
About friendship. It's a two
Way Street. You got to open up a little bit. We gotta go out and get drunk one night. Let your winners ride rain man. I
just wanna give a
shout out to this guy. Andrew
lacey
shout out. He
is the ceo
of a company
called Pre Nouveau.
Can you just flash it on
the screen?
I went to pre new vote and what
they do is they do a head to toe
M. R. I scan
In 45 minutes
and they use a bunch of machine learning
and image recognition to
help
a radiologist interpret
these MRI's in real time beside you. It's a service that
you have to pay a few $1000 for. There's a location in Silicon Valley in Redwood city and a
couple of others and we mentioned
it. But the
reason I'm bringing this up is he
sent me an email yesterday and he said, I just want to thank you and the besties
for mentioning pre Nouveau because
we had a bunch of people
come
and he said
we found no
less than 11
lifesaving
diagnoses 11
11, 11
individual listening to the pod
pod saves lives went to pre
Nouveau after hearing about it. Had a head to toe M. R. I found, you know, all kinds of issues
from a brain tumor
and brain cancer too, stomach cancer and other things and
was able
to get the care that they
needed. Amazing. Anyways, I
just want to give a shout out to him for for doing a lot of really
important work and
for the folks that are listening that
have
some money set aside and can
afford to do this. I would just really encourage you.
We have no financial stake in it. Nothing other than we are users of it. But
check out www dot
com and shout out to Andrew and his team there. Okay,
Here we go. three
two, Let's start the show the war
in Ukraine has
him insane in the
membrane
and Biden's new
disinformation council
is going to have him
detained to calm him down from
tanking Selena. He started
smoking that marijuana.
You know him as the rain man. He's here
again. David sacks. How you
doing? Have a good week? Yeah,
not bad.
Alright. Uh big energy this week. Huh. Okay. In high school, he
had no friends but
thanks to the pod undergrads are in his D. M. S. All
forms of steak.
He's a purge in. He's the vanguard of all the virgins. The
queen of kin, wa
the Sultan of Science. David friedberg. Wait, I missed like half of that because
was laughing so
hard to do it again.
Do it again. Let me
try from the top
in
high school. He had no friends, but thanks to
the pod undergrads are in his D. M. S. All forms of steak. He's a purge in. He's the vanguard
of all the virgins.
The queen of
the Sultan of Science,
David.
Just
for the record. There's no
undergrads in my D. M.
S. But I appreciate
the All right, we'll
check.
Alright. Three to try
for free Fergus
tweets and the show hasn't started.
I think I'm taking over intros next week. Okay. He's gonna do
Jaeckel please. By all means
next week. You do. You're a
comedian who has a chance to
prepare in
advance and think your thoughts go ahead.
Big boy. Give me a week. You got
it. Okay, yours next week.
Let's see these latent stand up skills in action.
Yeah, absolutely.
He's been hiding them from
us. Yeah.
I don't know a lot of stand ups who hide their ability. You know the funny thing about hiding something and not
having something from the
outside and they look the
same.
Sorry, jake. I'll
go over to you. Okay. He's
dropping annual
letters in luxurious sweaters.
As
far as the sparks go. Well, it can only get better
dictator himself.
I cannot
I cannot comment on the
spot. Oh my God. I mean, this is getting brutal. Who's writing these? Oh my Lord. Alright. Everybody. It's been a big week.
Uh, Did you, did you read my
Annual Letter? Any of You? three Assholes? I
I saw, you know, that's
a that's a no, I get it. I get it. I reviewed the table where you listed all your results and I actually sent it to my team. I was like, this is a really nice way of summarizing, you know, affirms results over, you know,
a long period of time because you had every
fund and
your totals
and uh all in all the key metrics.
Well, can I talk about that for a second?
You know what's what's incredible about
what you're saying? Saxes I
I was
interested in a bunch of other funds that I'm invested
in and their returns.
And then I've
also seen a bunch of leaked
fundraising decks of all kinds of other
firms from growth stage to cross over
to PE. And
it's incredible
that they are not standardized,
right? Some people only show gross I. R.
R some people show net ir
are, some people don't
show the total value
of the paid in capital,
which means,
You know, if you have a 100
dollar fund, what is the total value
of all of its holdings?
Some people don't show
D. P. I. Which is
distributions have paid in capital, which means okay for every dollar you've
taken in, how many dollars have you sent
up? If you
don't show all of them? What was
shocking to me is how much you can kind
of
hide and
play and manipulate the
numbers. And
one of the most crazy things that I saw
is that there are these
late stage funds that right
into their fundraising
decks. That what
they actually use our lines of credit to juice I. R.
R.
So what they do is
if they're about to do a
deal, they'll actually
get a loan from a
bank.
Put that money into a company, wait
until it's about to get marked
up.
And then what they do
is they actually call that
original money from their
lPS and pay back
their capital called line of
credit. So what does it do? It
inflates? I. R.
R.
But this is why if you don't, if you see the other numbers,
it still shows that it's
kind of like, you know, not doing much of anything. So if you ever
see
multi 100%
IR Rs or
high huge IR Rs
With zero d. p. i.
And a marginal
tvP I it's folks that
are playing games
to trick LPS.
Just a heads up to. That is
so weird. So what you're saying
is just to summarize for people who don't
understand, hey, we
get judged on the rate of return
each year. So if the stock market does
seven or 8%, were expected
to do triple that. So
We gotta hit 20, each year. Now
the clock starts
ticking when
the money gets called from the LPS,
the partners
and gets put into the
company. So if
you invest in your tour of your fund,
you pull the money down from the
LPS, you put it into
Youtube, whatever it is. What you're saying is
they will take a loan
against that future money from
a bank at an absurdly
Low interest rate, let's say one
Percent or 2%. They make the YouTube investment. Then two years
later, Youtube has a
price round that marks it up
20 X. Then they put your cash in in year
three of the fine year
and pay
back the loan. Now they've paid two
Percent two years in a
row. But the thing has gone
up 20 x what? That's,
that's dirty.
Well, so it's, it's dirty
enough that the sec has actually now
introduced legislation. It was in
february
that basically is going to
try to uncover all of this nonsense. And so you'll have to be much more
transparent. So the
format that I used in my
opinion is the most transparent way of
not being able to hide the cheese, you
show all the critical
elements together in a
simple table that
will make it
very obvious who's playing games and who can actually make money.
So there is
a semi legitimate version
of the loan thing which is um,
you know, where this comes from is a capital call loan. So you know, we're making a bunch of investments throughout the quarter of $1 million dollars here for a
see deal 10
million for a series
a you know, it's happening
all the time. You don't actually want to hit your LPS with capital calls for every single little small investment. So what
we do is you get a capital call
line from SVB or something like that and then you do one capital call
call per quarter.
And so they will loan you the money
for, you know,
1, 23 months, but it's not for a year. But the, but the reality
is if you have a reasonably well
developed infrastructure, you have a cash forecast
of what deals you may or may not close with probabilities and so you know what the weighted
amount of capital you need to have on your balance sheet is. So I agree with you to have a small amount at the edges
to pay for expenses to pay for salaries
while you clean up at the end of the quarter
completely reasonable.
But if you're making,
you know, five
Or 10% commitments
into a company and you're
using this as a way
to basically
create subterfuge and
hide. I think that that should
not be allowed.
Yeah. Yeah. The number of capital calls is
annoying for people. Yeah. Yeah.
Anyway I did share you
that table with our team too because I did like the format quite a bit.
I think we'll start
reading it this weekend. It's very hard for funds who are not performing to use that format. Now. Yours you're you're you're very highly performance so you can use that format. But I don't think
people that have not
returned money or or have fake paper mark ups can use that format because it is too simple.
Yeah. Yeah. At the end of the day, what
metric
do we all look at when we are LPS
in a fund? Well, this is what I
put down, I put down the ones that I look at for everybody else that I'm an L. P N. You
know what one is that for
you? I
I I I
I need to look at the totality
of it. I need to
understand what
is your gross and your net
Ir ours. Those are
important things to understand
because it shows how efficiently you put the money
to work.
But then ultimately then the other two things that really matter is what is the total value
you've created and
then what percentage of that have you given back to
me because
that allows you to understand how much
paper value this
for for example, today,
let's just say
you had a fund
that had a T. V.
P. I. Total value of paid in capital of a five X. A five X. On a fund is incredible.
But if you've
distributed none of
that, well, guess what
if we're sitting here in
May of 20
23 or 2022 rather the total value of your paid in capital is not really
five x. It may
be only three X. And it may be actually 2.5 X. Considering what the markets have done to these companies. Right? And so it allows me to really understand how
performant funds
are in, not
just being
a part of the game,
but actually
generating realizations. And this is the hardest part, as I told you, Jason like this past quarter, I think I passed two X across my funds when I was managing outside
capital
And I think my gosh, it took me 11 years. It's hard to return to extra
money and that means
I've returned $2.5 billion.
You know how hard that
was. Yeah. I
mean you gotta time the exit, you have
to have the ability to, you
know, you can't even time the exit. You have to you have to be constantly managing and working your portfolio. Sometimes you're selling in secondary transactions.
Sometimes you're actually
trading up in private markets where you help this company merged with another
private company. Other
times, you know if I
think about it,
the number of I. P. O. S. I've had is relatively diminutive. So how do you make $2 billion where I've only had one I. P. O. Which has been slack. Yeah. So this is a
really really hard
business and it was just a reminder that, You know, in the last four or 5 years, managing capital has seemed relatively easy. But in these next few years you're going to see who's really, really good.
It's kind of like old warren
buffet. You know, you really, you know, you can see who's naked when the tide goes up. I mean
said another way, the
Last five years raising a fund has been
really easy. Uh
and writing checks has been really
easy and now
comes, you know, act
three which is returning
a multiple
on the money you
easily collected. And
boy, is that hard? And you know,
all of these,
um, new lps,
all these Lps send me
even, I'm not an LP
and a potential, they send potential
LPS, their
performance because they're so proud of it. Like
quarterly. I'm like
not even in this fund and they have these crazy
markups, crypto
investments, this whatever,
but they've returned no
capital. And
so just to give you, just to give you a sense
of it, if you, if you look
at the most fantastic organization in the world, if it were an investment manager which is Berkshire, Their long run 50 year track record is, you know around 20
right? Gross.
If you
look at the most successful
asset manager in the world and I would put Blackstone at that, just incredibly
good
and best in class in probably three enormous
parts of the worldwide
economy, real estate credit,
um, and private equity,
you know, their long run track record is that on 200 some odd billion dollars of private equity and another $100 billion of, of
um,
of real estate they've returned to X. So that's what the upper bound is. You know, doubling people's money and generating 15 to 20% is the best you can expect if you are really excellent and long lived, that's the best. What do you
look at Fribourg when you're an LP, what number
do you care about? Because you LP other funds
and I think all of us do at
times I made my first
Venture fund investment in 2006 and
I am still
getting
distributions from that
fund
And I'm looking at it, I'm like, this is a 2.4 x
over that period
of time. I'm like, what the hell? Why did I even put this money
into this fund? I
guess this makes sense for pension funds and, you know, very
large balance sheet,
long range investors
that need to kind of diversify. But as
an individual,
I
should have put my money and have
had liquidity on it for
16 years
rather than have it locked up in a bunch of private companies sloshing around and you know kind of dribble out and at the end of all this I only get 2.5 times my money back. Two and
a half times your money in 16 years. What's that? I. R. R. It's like low teens. Yeah not a great
deal. No not
slower. You would have been you would
Have been better owning the s. and p. five
100. That's right.
And so for me I think the key, the metric, the only metric
that matters which I think you're
saying timothy is how much cash I got out relative to cash
I put in.
And so initially my my I. R. Is negative 90
7%
and then it goes up to negative 80 and then negative 16 negative 30
and negative 20
And now it's 14
percent because I
finally got more money out
than I put in.
And so it doesn't
feel to me
like you know
the just
generally private investing, everyone gets excited because we all get sold stories and individuals all gets old
stories of you put a dollar
in, you get 100 bucks and I mean J. Kael
wrote a book called
how I made 100 million
bucks from
whatever you invested
in Uber. And
um and that story I think it's everyone kind of excited but the reality
is
the vast majority of the
time and if you
diversify your bets like this,
you're gonna end
up waiting a long
time to get your money back
you're gonna be locked up.
And a top performing
fund is returning
2.5 X after 15
years, which is not
much better than kind of investing in the S. And
P. Or you could sell that anytime you want
and use that cash for any purpose
you want.
Well, if you did $100,000
Investment and you returned two
160,000
in 15 years,
I'm on an ir
calculator right now.
Internal rate of return is 6.5
8%.
Um Yeah, I mean
and if you did QQ QQ depending on
yeah.
How hot the market was then.
Yeah, it's really,
it's really really really
hard to
actually make money.
There are always going to be
periods where people look like geniuses and have mark ups, but you can really see when people have skill after
a decade and a couple
of up and down cycles.
And with hedge funds by the way, right, hedge funds put up a score every year
and
in certain macro cycles that can last many, many years, everyone looks like they're doing
well.
And then all of a sudden tides go out and you lose more
than you made over
that period of time. And then you realize holy crap, I was actually in an insurance business where you get paid some small premium every year and then you have some massive loss one year and that massive loss, it turns out your underwriting wasn't good because you lose more than the sum of all of the premium you collected
over that period of time.
And unfortunately a lot of investing looks like this, which is, you have small returns for a long period of time and then some massive loss. And uh, and the whole business makes you look
like, you know, along
the way, a genius. But the reality is over any, any long cycle, most folks
end up kind of in a bad position. Um,
and then, you know, the
sec, by the way, has,
um,
has solved this for
mutual funds. Right? And E. T. S, you know, there's, there's very
strict,
there's very strict standard
reporting. And I do think that
as, um, you
know, for example, like if you go to the
big banks, sorry to interrupt, I just want to finish the last thought. If you go to the big banks
and
you have, if you're an individual, like a doctor or a dentist or somebody and
they will
aggregate and pool capital and put it into these funds
on your behalf as an
example. So, you know, it looks like Jpmorgan or Goldman. Sachs is a, you know, 50 or $100 million LP in one of these big funds. But in fact, it's just the sum of a bunch
of folks on their
platform. It stands to reason that if the sec can actually mandate standardized reporting for private investing, it would actually be a really good thing because all of these games will and probably currently are as far as I've seen in these presentations, tricking a lot of
folks to put
their hard earned money into things that actually will never make
money.
And it's because if you selectively cherry pick how you present this data, you can tell a partial truth. So,
you know, I would really, I would
love I'm happy to be compared to any
organization, but every time I
hear somebody chirping about how good they are, my only comment is I just want to see your table in the same format as my table and we can compare it because it allows me to really understand yeah, liquid returns.
And by the way, the point I made earlier
about um, when
markets are generally
good hedge
fund public market investors generally can look like they're doing well by having a good marginal return above the benchmark every year. And then one year have a big draw
down and suddenly they
realized that their underwriting
wasn't that good. The
same can be true
in in private
investing in the
opposite way in the sense
that you'll put in small
checks, small checks
and lose money and lose money and lose
money and then have one big
banger and you get a
100 expert turn and you look like a
genius because your whole portfolio looks good, but you fast
Forward and you keep doing that for another 10 years. All those,
small checks may
not even add up to the
Bangor and
that's um that's the flip
reality that you realize. And by the way, I
think that's a good analogy for
the difference between public and
private investing. You
have similar cashflow economics or you can have
small returns and then a big
loss in public and you can
have
small losses and then a big return
in private. And the
timing of when you present
your data can make
anyone look good if you catch a good
hit at the right time or you
don't have a bad hit at the
wrong time.
And then the framing over
a long enough period of
time, I think really
becomes the key measure.
And the reality is most people don't make it
long enough in their career
to actually to actually present true
results in how they
really do underwrite, and by
the way, to the extent anybody's
listening is able to invest in these private funds. I think Jason
mentioned this uh
superficially, so let me just dig into it because I think it's really, really thoughtful
what he
said, which you should understand
if you have
the option to invest in a private fund, you have to understand that that private fund has
two huge
Negative things working against it relative to investing in the S&P five
100. So
you could put your money into a vanguard E. T. F. Or if you could put your money into a private fund, you need to realise two things. Number
one is it is
illiquid, not just for 10 years, but it could be a liquid for 12 or 14 or in, you know um
Fred Brooks case 16
years. So you need to get paid a premium for owning that. And then the second is depending on the business
model, you may have
very high failure rates,
which means
that you need to really hit these outsized grand slam home runs. And if you don't then you're going to be worse off than if you had invested in the s. p. 500. So that deserves a premium. And so Jason's right. Which is
the S. And
P. is between seven and 8% over long periods of time predictable compounding.
That's
You have to add another 7-8% for this illiquidity
premium
And another 7-8% for the business model
viability of for
example, being adventure. When you add those three things together, you do need to get paid basically in the
low to mid
twenties returns to be justified? Otherwise you are much better off just owning the S.
And p.
Much much much better off sex. Do
you what do you
look for when you're L.
P. Ng. And now that
you have many large funds,
What
do you think LPS are looking for now. And what do you advise them to stay
focused on
The # one metric that matters is
D. P. I.
Which is the ratio of distributions to paid in
capital. And it's basically
money in versus money out right at the end of the day, that's all that matters is how much money did you put in the fund? How much money did you get out? The issue is that to Thomas Point, these are 10 to 12 year funds
and it takes
a long time to get distributions. So all the other metrics are basically triangulation. Czar approximations of what you think the funds going to do until you actually get to distributions. So I would say in the long term it's all D. P. I. In the short term,
you look at T. V.
P. I. The total value to paid in capital.
So it's basically, what's the
marked up value of all the positions in the portfolio versus how much cash has gone in? And then the big question is, does the T. V I T V. P. I turn into
DP I
have to explain that
to people if thomas
had invested
in
slack, but there hadn't been an
outcome. It could be on
the books for a billion dollar
position. So the T.
V. P. I is
looking really great.
But until that
company goes public and the shares are distributed, you know, the
LPS haven't realized
it. So it's
it could be ephemeral
or it could go down significantly
as we've seen with public markets. Yeah.
So in the
Last four months we
just returned
our fund one in terms of like real distribution. So I think we have like a DP I have like 1.11 point two on that fund. Now the T. V. P. I. Is like 4 to 5. So but it feels great just to distribute the entire fund out literally in my
1st 2 funds. I think
we did that as well and it's a really great feeling
and
you know, sometimes
You know selling 10
or 20% of a
position
early and getting over
that hurdle
and just getting into
The 1 - two x. That's a pretty great feeling
by the way, just to talk
about how difficult it is to convert
paper
gains into real gains.
Let's just say
Jason, in your example, you had a fund that had these huge paper gains but haven't distributed anything as coming into this year. Okay, here's
a little interesting
data about the ultimate buyer of all of these text talks, which is the NASDAQ, right? People that buy stocks in the NASDAQ listen to this as of
yesterday,
More than 45% of stocks on the NASDAQ Are now down 50%.
So basically
one and two, More than 22% of stocks on the NASDAQ are down
70
5%. So almost one in four and more than one in five
and
Then more than 5% of stocks. So one in 20 On the NASDAQ are down 90
percent. So
you can use this to actually get a blended average. But
what it means is that
the ultimate buyers of tech stocks
are taking a 60
percent discount
to what they
were able to buy even just four months ago,
60
percent. So there is
no public
mark
that will
Support a private mark unless it's also discounted by at least 60 now. Think about that when you talk about this entire panoply of companies
that have
been over funded,
many who
are under executing and burning enormous amounts of money, who now have to come back out to the market
as any
sophisticated buyer will have to tell them the truth, which is, I'm sorry guys, but the
data says there's
A 60% discount to
this mark. Are you willing to
accept it or not otherwise? The
lights are gonna go off and these marks
only happen
uh, at
least in the private markets and
venture funds
when a transaction occurs. So
if somebody raised a bunch of money as we talked about in previous episodes at a billion
dollars, You know, uh and they're now worth five
100 million. That's only gonna work itself out in
fun documents and
reports for
a year or two later when the next transaction occurs
so that
there is a lagging
effect
one day, I just want to bring up before
we go into,
um, maybe
GDP or the bill.
Uh, wind situation is what
we talked about
on this path last
year about what
was gonna happen in private
markets. I've
Been seeing the last two or 3 weeks and I don't know, sacks
and Freeburg what
you're seeing in private markets, but really
acutely
people who are going out and skipping
rounds, just like,
I'm gonna, you know,
just skip my seed around and just do a series A
I don't have product market fit. I'm gonna get
credit for work
that hasn't been done. I'm
Gonna raise 10 million
without product market
fit. Oh my Lord! Has
this, uh,
that has the dialogue
changed? I've been on
many calls with founders who
have met with 50
Vcs and
the conversations are
moving to, you know, how many months to
break even and
uh, you know, how many customers you have and how they increase. And let's talk
about the turn, it is getting,
uh,
super pragmatic out there if you're
a founder and we, we said this a year ago,
but it's worth stating here,
this is not the moment I
would try to over optimize
if you have a
term sheet or money on the
table. I would,
I would close it
just, you know, founder to founder. What are you seeing
sacks? Yeah, I mean, it's, it's gotten a lot harder, I think, especially the growth rounds, we actually have signed to growth term
sheets recently
and it was much harder for us to do growth rounds last year just because you had these huge mega funds come in at crazy valuations but now they're kind of licking their wounds and we're starting to see some really attractive growth opportunities. Everyone else has backed off. So it's interesting.
Yeah, it's changed quickly.
Yeah. Now 1 1 thing to you know, parents raised a good point about you know private not only our private valuations sort of sticky but private
marks are
sticky. And you know, companies only get
remarked every couple of years.
And so whereas the public markets get remarked every
day. So
it is hard to
know like what is the
proper valuation of
a company that
raised money last year
because
yes
valuation multiples have
come way down but then
also they may have grown and their performance is better.
So the
analysis that I saw Jason Lemkin do in his
LP newsletter
and we're
basically repeating it for our entire
portfolio is to calculate what was the R. R. Multiple that you paid basically evaluation divided by R. R. What was that entry
multiple and what is
it today? And so we're doing
that across the whole portfolio. So what
you see is
sorry sorry, socks
clarification, L. T. M. Air or you know
uh NTM
Air or which
one basically
You last 12 months next 12 months.
You know you just look
at their current error which is you know, run rate their current run rate revenue. Yeah.
Take
January you times it by 12? Yeah, basically
yes. You take the current month
Multiplied by 12 but they
have to be annual
commitments. Right? So if
it's not it has to be annually
recurring revenue. If they're not and if it's not an annual commitment
with an
expectation that's recurring, you can't count it. So for example, you don't
count professional services revenue
in that in
any event.
So the point is you you
basically calculate
what was the
multiple that you
paid at?
You know, entry in the
company and what is it today
as a
function of the current valuation?
And
what we see is, yeah,
there's a lot of companies that we got into,
I don't know, two years ago at evaluation
multiple that you couldn't
defend today
60 times eight times 100 times. But the multiple
today
Is more like 10 or 20 times because it's actually growing really fast.
So you need to look at both
sides of the equation and that's the analysis
were running for every company in our
portfolio and then you know, LPS can decide how to how to market.
I mean
the most important
thing is what's the next
investor if they need more
capital going to market at? Well the question is are you
growing faster than valuation multiples are
falling, correct. And then can you,
that means you
could have a down round a neutral round or possibly an up round. But it doesn't.
So are you starting to
see people or
people discussing on
the board level or in your firm?
Hey maybe we take
a sideways
around a neutral ground.
We just go to last year's price and top off another 10 million. Are you seeing
that? I've told some of the boards I'm on. Just keep fundraising. Just keep the round
open top off if
there's money available
because you know
especially if you
raised around eight
Months ago, six months ago.
Those
prices like if people are
still willing to invest in those
terms that's a good deal.
I literally had this conversation with the founder this week
where they
had raised that in a great valuation and
they turned money away
because they
were like
we're
still growing so
why would we take the money
now if our valuation
Is going to be you know double in nine months
and now it looks like yeah
Maybe you know that extra $125 million dollars would have been good to lock
up. Okay so
adding to these headwinds,
I think we um
we've been talking about the
possibility of a recession for those uh new to
the to the concept of a recession if you're
Under the age of 30 and
haven't really lived through one as an
adult. It's too
quarters the official
Defined 2/4 of negative growth of the GDP.
Well it turns out
Us GDP fell 1.4% in Q
one.
Uh and Q four, we had a 6.9% growth rate. Q one was the weakest since the spring of 2020 when Covid hit nick que the clip
word sacks. And
I basically said this may happen in january of this year.
So the
concern is that, you know, with the losses were seeing and I mean every day it just keeps like you've seen more read that this could turn into a recession. You know, popping of bubbles is usually followed by uh by recessions are so I think, you know, the fortunes of the economy could turn really quickly here and that is that is the marginal risk. The marginal risk is actually for a recession. David is saying something really important. The risk in my opinion is not of runaway inflation anymore. The Fed is now in this really delicate situation where china cut rates. Last week, we have an FOMC meeting the Open markets Committee that sets rates on Wednesday, I think of this coming week. What is he supposed to do? The risk is to a recession because if we
overcorrect
and the leading indicators all around the world tell us that their economies are weak, then inflation may have actually been much more
transitory than we thought.
And right now we have to decide because if we overcorrect, we're going to plunge the United States economy
into a
recession. There's a lot of
data here and obviously this is
when this data
is always in the review mirror.
So obviously we're talking about Q
one. It takes a while to collect this data
and there's a lot of different factors going on
at the same time. Obviously Covid
and obviously supply
chains, consumer
spending rose at a
2.7
annual rate in Q
one, a slight acceleration
from Q four. There was also a nine
2% rise in business spending. So
we have a lot of spending
going on, Who knows if that is spending that actually occurred
in the previous quarters.
And because of supply
chains, like people's cars
are being delivered to people's machines
and manufacturing
equipment is being
delivered. Now we had negative
GDP in Q one
for
a whole host of reasons that can effectively be summarized by the fact that we are still trying to
restart
an economy at the tail end of a pandemic and we're doing it in fits and starts and so we
have these small bursts
of incredible GDP which we had
last year and then contractions
in the economy.
The thing
that's always been true about the United States is that we are a consumer
driven economic
engine, which
means that as long as people
feel confident
and they're buying things,
the economy tends to do well and we tend to move forward as a society
when consumer confidence ebbs
and people contract, they're spending, we are in a world of hurt the last couple of years, we've
had a lot of
consumer savings, right? We've had a lot of money that's been pent up in the system, whether it's stimulus checks or you know, loan forgiveness
or all of this stuff
has allowed people to
feel much richer and
as a result they started to spend in dribs and
drabs. The problem now
is that because prices are so high, all of those savings have largely been depleted. I just sent you guys
a a text
in the group chat of what consumer spending looks like in consumer savings rather.
And it
tells a really, really scary story, which is that the savings boom is largely
over. Personal savings
Rate fell to six
2% in March, the
lowest since 20
13. And so
what does that mean? Well, it means that the setup is there for um us
to sort of really
contract what we are able to spend as a society.
So I think now the
odds even
push further in
this direction
that we could have more
quarters of
negative GDP.
And all of a
Height we're back to what we talked about before, which is a 2019 like scenario where
the government or the feds specifically
races forward to tackle inflation.
And in 2018
and 19, it turned out
to be a head fake.
And by the way,
In 2019, the stock market ended up
More than 30% up, 32
percent or something like that
crazy numbers Here. And by the way back then in 20
19
china turned
over, it looked like
it was going to be a fast moving economic recovery for china and instead
they, they sort of
slowed down. We have the same thing here,
we have a
quarter of negative GDP,
we have china
in lockdowns. We have every company that's, that's in the manufacturing supply chain ecosystem telling
the world
that we don't really know what this is going to look like. Intel today
actually said there's going to be
Shortages and Chips through 2024.
So I think,
I think it could be a very difficult
path ahead for the
Fed. How do you raise
rates,
400 basis points into,
into a slowing economy, you could raise basis points
75, you know,
75 Dips, maybe 100 VIPs, but it gives
them very little freedom to operate without really
tanking the economy. There's
also another point
to highlight here which is um,
in some of this
data that was released, um
there was a strong
indication that there are
real issues right
now with inventories.
I don't know if you guys have tried
to
buy an appliance or a car lately um, or
a piece of furniture, but
Like I tried in the Q4 to buy
a car and it was
absurd. I mean right
now there's like one year delays to get a freaking couch. I mean
like everything in the,
in the global supply
chain somewhat
related to the
kind of big inflationary
pressure that hit us at the end of last year and then everyone placed orders. All the factories kind of have to produce a lot. They all couldn't keep
up through to what's going
on in china right now where there's lockdowns and factories are shut down.
I
have several businesses
in the hardware space
that are actively searching and
frantically trying to find components,
suppliers,
specific
parts, Even basic raw
materials like aluminum
are very hard to get ahold
of.
Um, and so there's also a very
challenging inventory and supply chain problem
when that happens, I can't actually
wire money and buy aluminum
because I'm waiting
for aluminum to show up.
I can't
wire and by the
microchips I want, I can't wire
money to my car dealership and buy money.
So that doesn't get
credited on the GDP counter
because those sales didn't close
that quarter. And as we saw with amazon recently and others
and apples just
said that they're expecting,
I think close to a $10 billion dollar hit this quarter
because of supply
chain issues, a
lot of folks
want to spend the spending interest is there, the
capital flows are
there. It's just that the supply
chain is clogged up and
we're so dependent on getting atoms
and molecules moved
around and they're all kind of held
up in different
places that folks simply can't get their purchases
in. And so the
revenue triggers don't
get hit. And so
the numbers don't look good from a growth
perspective, but it
doesn't necessarily mean that the
demand isn't there?
This is a significant
inventory problem
and supply chain problem
that's, that's driving a lot
of this, um, this adversity right now in the market
seems
and interestingly, by
the way, that doesn't, that doesn't mean sorry, that doesn't mean that we're not gonna have a recession
because you know, when I, when
I'm not able to spend money on apple, apple, spending less on their suppliers
and they're spending less on their suppliers. So
there is a trickling
effect of capital flows
and, and the recessionary
effect maybe hit, but you
know, there is capital and there is
demand for consumption.
It's just
that, that were really clogged up right now. Well and
the consumer
confidence index
has been on a bit of a roller coaster. We were at 130 before the
pandemic
For the year of the pandemic. We were down in the high 80's 87, 88, 80
nine,
we rocketed back
Up, um, you know, in 2021, people started to feel like, oh, we've got these vaccines, things are gonna go back to normal
Rocket back up to one
128
and it's been a slow tick
Down to where we are now at 107. And so
I think consumers don't
know what to think, they don't know if, you
know inflation is transitory,
They don't know if gas is going to be $7 or $4.00.
They don't know if they
should spend a big
spend on a big
vacation or not. And so this
I think in terms
of people's
planning, I don't
know if people can plan
how their own personal
budgets, right? And I think that's on the confidence thing to traumatize point.
We need to have a
predictable economy and
you know, it it can't be
this um
schizophrenic
to use the term
sacks. What what do you what do you think
about what we're seeing here in terms of,
we're obviously
either in a recession or
did you know, dancing
around it were basically you know on the edge of the cliff right now, I think it's probably the most accurate I tweeted in
february, hey anyone noticed that we've just entered a recession and I got dunked on by all the professional economists and you know, all these people, but
exactly correct.
And now it's like the data just came out negative 1.5% economic growth in Q1. So what I wrote at the time was exactly right
and you
know, I don't know how the thread the fed threads, this needle, I mean we've got a slowing economy with negative GDP growth, you've got inflation is
still
rampant. Um It's not as, I don't think it's gonna be as high as last year just because we're lapping a much bigger number from last year. So on a year over year basis, the comps are, you know, you start at a higher price level but inflation is still
there. So
you know, I don't know what you do about that. Um It's
it's a really tough situation
and when you have this kind of wealth destruction in the stock market, I
mean you
know, and we there was a
good tweet
that um mammoth you share, but you put up on the screen, I mean so much like wealth has been destroyed.
You don't necessarily see it if
you just look at the big cap indices,
but you
look at all the engines of sort of growth and prosperity, the small caps, the recent ipos the growth stocks, they've been absolutely hammered. It really hasn't been this bad since
the dot
Com crash of two
1000 like and and
not just the like april period, but like all the way in october where it kept going
and then
The 2000
Yeah, the 2000
eight real estate crash, so
we're already
like top three
worst
Situations for growth stocks in the last 20 years. And when you have that kind of like wealth destruction, it eventually trickles down into the economy because people just feel,
you know, companies
start cutting budgets, people have less
money and just feel the
spending goes down that dynamic that that we're referring
to in this tweet and that image is
called dispersion, which means,
you know, people may
be confused
when you hear why
are all these stocks down so much? But the the indices
are not down as much. And it's
exactly for the reason
that David just said,
which is that underneath the surface,
the mega
cap text consume so much of the market cap of these indices. So you know the googles the Microsoft the apples and the Tesla.
Those
Four just clog up an enormous percentage. I think it's approaching 40% of these of these indices. And so underneath the surface you have dispersion which means you have
These tale of two
kinds of stocks. You have these four
big mega caps
and then you have everybody else.
And the mega
caps are generating so much cash
that they're just basically
keeping the market afloat. So at this point maybe there's a small silver lining
and that silver
lining is that to be bearish right now
is
effectively not being bearish these growth
stocks because as we said,
they've been just decimated
at this point
To be bearish. The indices means very specifically to be bearish those four
names.
And only those four names. And so that may actually mean that the market is effectively
crashed already. Yeah, but
by the way, I'm not necessarily bearish on growth stocks from here because like you said, they've already been beat up so badly. The stock market is usually a leading
indicator. What I'm a, what
I'm a bearish about is just the state of the
economy because the stock markets traded
down, it trades down
expectations. So
it was already trading down
months ahead of the slowdown
in the real
economy. So now knew
in december the
market new in november, the recession was coming
and like around November six of last
year. And they knew it was coming in market new when we
talked about the sales that Bezos
and musk did the, you know,
when we sold, when
we sold equities, we were saying like, it's like, you
can't
keep all of your money
on the table all the time,
unless you have the duration of the wherewithal meaning you're just not time bounded and
you can just be there forever
and not everybody's in that
position and endowment could be in that position,
but individuals with no, an endowment is not because they have to create distributions every year,
right. They have to talk about the mega endowments where they, you know, for
sure, you know, you know, ford
or Harvard may not need to do this, but
smaller ones might actually
be operating, you know, memorial Sloan Kettering might actually be operating their
budget from it. Yeah, but just to go back to David's
point, like, it's a really difficult spot. Like
what is the Fed's supposed to
Do? So they're probably going to tighten 50 basis
points in May that's
relatively well expected will be, will be able to digest that
reasonably well.
But what did they say to David's point?
You know, if they all of a sudden
go on a
crazy program
of quantitative tightening,
right? And what is that again?
That's when, you know, we were spend, they were spending, they were printing,
you know,
money billions
and billions of dollars going into the market,
buying
securities and giving people
the money, right? That's
called quantitative
easing. Now
we're doing the opposite
right, where
they're selling and they want the money back.
Now, the problem is what that does is that
removes liquidity from the market. And
when you remove
liquidity from the market,
you actually
make it a little bit more fragile, a little bit more precarious,
a little bit more
price sensitive. And
so it puts
us in a very tough situation
when
the economy is slowing when these guys may be raising
rates and then at the same time removing
money from the system,
it may
be a lot for all of us to handle. And so I think that they're under a really difficult,
well, there is a business
cycle and, you know, there
are always recess recessions
periodically every 7-10 years. But they have really magnified this because you had the
Fed for years
maintaining interest rates really too low
and doing quantitative easing during a boom. And then the federal government was printing trillions and trillions of dollars and they didn't stop. It was one thing to do it during that sort of covid recession, but then
last year they printed that last
two trillion and that's what set off this wave of
inflation. So, you know,
when I was like in school, learning about economics and they would tell us that all these government
programs and actions are
like automatic
stabilizers or what have
you like, the government helps
balance out
the business cycle.
No, the government like magnifies the business cycle. They've made this so much worse. Well, they're putting their hands on the steering wheel, right? It's like let
the economy drive, let the
free market do this. And if you
start, you
know, you might oversee our into the federal
government is great at setting incentives, right? And creating like tax credit
programs and incentives for
private enterprise to invest money. But when they act as a direct market participant and start to actually
direct capital flows and make
decisions about how the capital
market should work,
it never ends well,
because this is not what they're good at.
Well, I think there's also
another, I mean, just
to counter that
there's, there's also this other issue of not just incentives, but when they create a free capital
that then allows
a market to find a way to take advantage
of that free capital
and that's effectively
what we've seen happen with
Medicare,
Medicaid as well as with the
student loan program.
And um, you know,
I, I don't know if we're gonna get
to the student loan program today. But I think,
you know, to your point came off,
one of the things that's happened
with the cost of education
in this country is
that the federal program,
which was, you know, and I took a bunch of
notes here to talk about this today,
but the federal government began guaranteeing
Student Loans in 1965.
It's called the federal family
Education loan program.
And that program
made capital
available
for
students to borrow to
spend on universities
or
whatever education
they want to go
get some of
their own choice.
And the idea being
that that will give them the ability to go make more income and extend their careers and and educate the workforce.
And the problem is that when
that capital was made available, a
lot of private universities
started to emerge and private for profit colleges started to emerge.
And in the
years since that, that program was introduced, I just
want to give you guys some crazy
statistics.
So in 19 1969
70 era, the
Cost for a public four Year college was 12
100 bucks a year. That's room board tuition and fees. And in 2020
that
Cost rose to 21
$1000.
And here's the,
the, the
Other crazy stat for private for your college in 1970 2500 a year, 2019 20
2046
$1,000 a year. And
so that capital basically
allowed these for
profit
organizations of these
organizations that trying to grow
their endowments, which are
effectively like for profits
to charge any price they
wanted. And
the consumer, the student would be able to get free
capital to
fund that quote unquote education
because it
was available to them for free
from the federal government.
And so the federal government
created a bubble in
education costs and that bubble in education cost
has now
overburdened 15%
of american
adults with student loans
that many of which would, they would never be able to pay back. And now we're in this
really awkward situation
of saying, hey,
maybe we should forgive those
loans because it's unfair that people are burdened
by this.
And um, and
doing so obviously doesn't solve the fundamental problem
which is that making
those loans available in the first
place creates an inflationary
bubble effect in the end asset and the end asset in this
case is education.
But we've seen the same thing with housing and we've
seen the same thing with pharmaceutical
drugs and medical care
and other services. So
any place where
the federal government steps
in and says, I will provide a
backstop, I will provide free
capital to support and create a quote unquote incentive
for this market to
accelerate. You end
up with these inflationary
bubbles, you're going to have people game the system
right? You get whatever university of phoenix types and and
even the
large
universities
raising
tuition to observe
things And people take
these loans to
moth before
their frontal lobes are even fully developed and they have long term
understanding of the ramifications of this. So
where do you stand on Mr mafia?
So there's
a there's an interesting article in the atlantic about who really wins
when you
forgive student loan debt and I and I just pulled out some facts so I'm just gonna look down
here and read them just so I get them right.
It said in the article
13
percent of the US population carries federal student loan debt.
Grad
Students account for 37% of that
federal student
Loan dollars. Currently it's 1.6 trillion of total
total student
debt vs about 10 trillion of mortgage debt.
So the average
Debt has gone from about 20
5K. 2000
12-37 K. and 2022. So you know, almost a 50
increase in a decade.
The majority of student debt is held by white
borrowers. Only 20
3% of black Americans aged 24 or greater have a college
Degree in 2019. So the majority
of the black population would not be directly benefited by student loan
forgiveness.
In 2020
the median weekly earnings for someone
without a high school
diploma was six
$119
for those
with some college, but no
degree. That
Number was $877
for those with
A bachelor's degree. It was 1,305
dollars. And that number
continues to grow for masters
and professional degrees.
And, and phds, interestingly, the
Last two points. The
gallup organization who ran a
poll is unable quote
to report the percentage of americans who have mentioned student debt or student debt cancelation
because it hasn't
garnered enough mentions to do so. In 2022,
according to the article.
Across four gallup polls quote just one respondent mentioned student debt as the
most important problem
facing the nation unquote.
And then last
Thing is here is that 43
of
The 2020 biden
electorate graduated
from a four year college or
university versus
36% of
Democrats in 2012. So, you know, one of the takeaways is
that this
may be an issue that affects a certain
percentage of the dems who went to
college, but it may
not represent a plurality of
all democrats and it
doesn't really represent, you know, a majority of all sure are vocal though, to your
point, I think,
yeah, I mean, look, this
is why I think
That there are two motivations,
political motivations for doing this now. They're they're pretty obvious.
Um and then
I just want to say three things on, on kind of the concern about this and why I feel very strongly
that if we don't fix the underlying system.
You
cannot forgive student
loans, you have to fix the system before. Forgiving student at first, what's the number one fixed freedom. Well,
So, so let me just say the two
motivations, the two
motivations, Number one, this is a stimulus. So this morning the biden
administration said
that they were thinking about taking
executive action to make the
1st $10,000
of student loans forgiven. So if you do the math across 43 million people, that's a roughly half trillion dollar
forgiveness.
What happens that
$1 trillion, much like we saw last year becomes
a stimulus payment?
It is money that people now have
that they didn't have before. It is capital
that they or freedom from debt
that they didn't have before
and it will stimulate
the economy.
So there is a very
important
economic incentive here to do this,
which is if we do it, it will
be stimulating to the economy and people
will spend more
and the economy will
grow by the way, that's
a, that's a 2.5
percent boost to GDP.
Right? So half a trillion dollars of free money just flushes into
the system. The
2nd thing is that it will
help in the midterms is their point of view,
right? So they've obviously done, they've done the polling here, right? And, and it's like, hey, when I was in junior high, the kid that ran for class president was like, I'm gonna make everything in a vending machine free,
guess what that kid got voted in. So
you know the idea that you're just gonna give everyone free, give your your loans back to you for free. Everyone's like, my gosh, this is the best thing ever. Elizabeth Warren, you're a genius. You know, Bernie Sanders, your genius, joe biden your genius, Let's say yes. Um, and so they believe through polling that this is going to help help them
in the midterms.
Um, but the challenges, if we don't solve the problem, if there's no standard of
value
of an education, if there's no standard around whether or not a specific accredited university increases your income and earning potential as an individual or increases the opportunity for you as an individual, you are wasting money, You're giving federal dollars to private companies who are profiteering from that and the individuals are not going to benefit from
it. And I think
that, that we're seeing this, sorry, and we're seeing the structurally continue in a lot of other places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant to benefit the individuals that is being funded for the individuals are not getting a good education. In many cases, they're not earning more by getting this education tomatoes, data speaks to the average, but a large percentage of people go to crappy universities that don't improve their earnings potential and then the federal government says, here's this free money that private university just made a bunch of money and no one is better off. And guess whose end up paying for taxpayers are gonna end up paying that private company a bunch of money because we're going to forgive all the loans. And so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university proved that it improves the potential. And by the way, if you stop the federal student loan program
today,
fewer people would go to college and fewer people went to college. Guess what would happen? Colleges would drop their tuition, the reason they're able to supply and demand and the reason they're able to raise their tuition because there's so much demand because there's free money. And so if we actually saw the federal loan program cut back
or put these
standards in place, the cost of tuition would actually decline and profiteering would decline, People would get a better education and
the taxpayers would be better off
end of diatribe. Sorry. No,
no, it's, I think it's completely
legitimate sacks. We talked
on a previous episode about how people make things like
immigration, uh, you
know, such a charge.
Philosophical debate
when there are point based systems being
used in Canada Australia
and other places that make it much more
logical. Do
you think the solution here is to free burgers? Point of
just, and I'm interpreting free
Brooke's point as what
is the value of this degree. Nursing great nurses can take out 100% of their loans because we know there's
a nursing shortage.
Uh you know, philosophy
graduate students
Maybe can't take out more than $5,000 in debt because we
don't see a bunch of
job openings for that. Getting a history degree trump university is a lot different
than getting a nursing degree.
So sacks. What's the
solution here. Uh and then
we'll let give you
your your
swing at bat
in terms of buying
votes. Yeah.
Look, I think that
alone only makes
sense when
it generates
ry right? It
makes your going to generate more
income on the other side of that
loan to make that loan
worthwhile. And the
problem here in too
many cases is these kids go to these schools, they spent five years there, they get a
degree
in some woke
nonsense and of course it doesn't help their
earnings power. I mean that's that's the fundamental issue here. Is that these degrees are worthless, right? I mean if you go, if you go to, if you go to college to get
you know, to become a
doctor or maybe
a computer program or
something where the skills
have value,
then of course you can pay back the loan because you get
a
gainful job
but you know,
otherwise if you just
major in fine arts at Harvard or
something like that. I mean
you basically graduate, you get a job
at what the new york times
is your dream. You can't pay back your loans, you're saddled with this enormous debt and think
about the cultural impact that has.
You have this young generation who believes in socialism
and I think this is a big part of the reason
why is they have no
capital and they have no
ability to accumulate capital because they're so saddled with debt. So to interpret what you said sex, hard to believe in
capitalism if you've
got no capital, right. If you start, if you start the
Race at -200
$50,000 in
debt to get a degree that
was basically worthless for you.
Look,
I think
maybe what we do is we reform
the debt.
I had actually okay with forgiving the debt in some instances if you got a reform
of the system, in other words, if
we stop funding these worthless degrees,
but if
you're basically going to acknowledge that, hey, we need debt forgiveness because these degrees are worthless. Why would you keep
funding those degrees? So
you know, we need to have like a more
honest, comprehensive
solution here.
The other thing we should do actually
is one
really crazy part of
bankruptcy law is that student debt
is one of the only types of debt that's not
dischargeable in bankruptcy. I
don't know if you guys know that, but
under George W Bush's presidency. Yeah, basically look, when, when, if, if you ever get to the point
where you have too much debt
and you can never pay it back, You
declare bankruptcy
and then the
court starts you over from zero. So you can at least
start building some wealth right? Exactly. No
one's going to want to give you credit after that. But at least
you're not so deep in
the hole, you can never recover. So that's the point of of a personal bankruptcy.
But the crazy thing
is that in bankruptcy you cannot get your
college
det, your student debt
canceled. You can get
your credit
card debt canceled, You can get other types of debt cancer. You can't
get your student
loans canceled. It's crazy. So
that's one thing they should fix
immediately is
it was private
market Sachs, you
wouldn't need to do that. Right. The reason that's the case is
because it's federal dollars that
are funding those loans.
But if it was private market dollars, people actually, if banks and
lenders took a loss
when people couldn't pay back the
loans, then the market
would work itself out. The problem is that the federal
government stepping in and trying to be
a market maker rite
and it creates this, this totally crazy incentive.
Right? It creates, it creates
double distortions. On the
one hand, like you said, it
basically means
that because governments money
is funding everything the
tuition goes up because colleges
take advantage of it.
But then also nobody
is really making a
smart ry
decision about whether
a smart underwriting
decision about
whether this loan is worth making, whether it
actually stands
a reasonable shot at
being paid back.
There is such an easy free market solution here. It's called an I. S. A. Stands
for income sharing agreement. This is where
you give a loan
to somebody and
you get a percentage of
their income
over a period of time capped at a
certain multiple
say two X.
And what
this does is
it aligns the person giving the
loan with the
job that's expected to come from the education. You already have that. You already have
that. It's called taxes. Yeah but here's the problem. Nobody's watching
the store. So nobody's looking
at it saying I will give an I. S. A. At
this percentage return for nursing nursing. I gotta
pay 50% of my income every year to the federal government, the
government like I pay taxes. The thing we have to remember
is like if the federal
government tries to do this, it really is just about buying votes going into a midterm election. And here's why if you
arbitrarily
give a bailout of
one sliver of
the population unless that sliver
is really really large.
Which we know it is not,
it's going to really
anger everybody else. Think of all the people
that are tradespeople, Working class people who don't
have a college degree.
What are they going to think?
What about all the people
that just finished
paying off their debt? What are
they going to think? It's going to upset so
many people and ultimately what this is, is a bunch of coastal elites who are miscast
in jobs and
saddled with debt is pushing pro for a program
that isn't a broad based mechanism
to create a quality at all. It's just to get out of jail
free card for a small
people or a
small group of people who unfortunately
were taken
advantage of and this is the thing that we're not
losing sight, we're losing sight of, you can only pay
back a loan
if you're making more
money than you. Oh and the fact that
this exists shows that these loans
were really
poorly constructed
and they were given in instances where they should not
have been in the private
markets, we have
seen that happen, but we go through
a cleansing mechanism to sort
it out.
That's literally
What happened during the two
1008 real estate bubble. People
gave mortgages to
people who could not
exactly identify as
a lender. Think that you're not going to be able to pay back the loan.
I don't
give you the loan.
That's the
simple mechanism that exists
in free markets. And
part of the issue is
a lot of people got
loans thinking without doing the calculation, will I ever be able to
pay this back and they
took the loan to get an education culinary concept that I will just make money. But let me ask one other question of you guys at what age
and at
what level do you think individuals should take responsibility for the decisions
that they're making when
they take on personal debt? Because we see ourselves getting in the cycle where consumers are given debt. They don't think
about
the consequences of that debt down the road or do the analysis themselves and maybe
they're not equipped to
and they'll take out a loan on a car on a house.
But the problem is
education. But but
here's the thing like education is a very dangerous thing
because we put
so much societal credit and external signaling to it
and we give everyone
effectively the same quantum
of risk. But that's not true for a
credit card nor is it true for a car loan.
So the private
markets are efficient in that when you first try to get a
credit card, sure
You don't get an amex centurion or platinum card, you're given a chase sapphire card with a $500
limit and you
earned the right to borrow
more. Same if you
applied for a car loan, the same with a mortgage,
it's based on a down payment. So
there's differential risk
pricing
and if you don't have differential
risk pricing,
you're getting a lot of people, how
would you edit education? The market would figure it
out. The market would because you would differential price
the risk as you
can literally a brainstorm. But right
now like what are your grades,
what courses did you take? Whatever, whatever
it is, skills were not going to
get it right. The market will get it
right, but the market
would figure it
out. The problem is and
and and sorry, the incentive was, and this is a really important
point. You know, if you guys
read Ray Dalio's book, which we've talked about a number of times, he's identified and highlighted that a growing
economy and a
successful um country
improves
by improving education and having more people
get higher education,
generally speaking. And so the initial incentive, the initial intention
behind the
federal student loan program
was a good one, which was to give people access to capital that the private markets
we're not providing at the
time so that they could go out and get a higher education, We could improve the education of our
workforce and
we could grow our economy Nowadays. The question that we always forget, remember we always get one
Step away and then two
Steps away and five steps away and we missed the point.
We're in that moment now where
the question really is,
is the federal
student loan program doing more harm
than good, where we actually are
we actually creating value from our higher education system in this country or not? And, and, and most importantly, is the
private market there because you look at the
Total debt outstanding $1.7 trillion dollars
there would be a
friedberg friedberg
don't sell beyond the clothes. The answer is no, we have a massive employment gap.
Okay. The data
tells you in every single which way
possible that we
are not educating our young people
to take the
jobs that are needed
for a high growth
functionally
moving economy.
We know that so
we are mis educating
these folks
and then we are giving them access
to enormous amounts of debt that they have no reasonable chance to pay back. And
I think that that should be
fixed by fixing the incentives of the universities.
You are right. Universities today
are for profit asset management businesses wrapped by this philanthropic do good or nonsense that they try to tell people
to get you to go there
And pay $50,000 a year in tuition.
It's a joke
and they come out and people to think that these degrees
are actually
going to make them successful humans,
they come out miseducated and undereducated and incapable of servicing the economy's needs separately. The other thing, if you take a step back and take student loan off the table for a second and just say any consumer handout that
touches less than you
know, 40 or 50% of the economy or of the population of a
country is
very precarious. So
Students student debt in this case 15
percent of the US population. So a lot of people, but
It also means that there's 80
5% who don't benefit,
What will those
85% of the people say when they have to foot the bill for the 5th, 1st 15%.
And then what do you think
happens with other kinds of debt? What happens when the oil lobby says forgive our debt because we're in a national energy crisis? What
what what will all the
climate folks? Well, it creates a slippery
slope. And
and and my last point on this
is to the extent that
we actually want to forgive student debt. I'm fine. If that's the law of the land, that's great,
it should go
to the floor
and issue to be debated
in Congress and it's a law that should be passed, but it should not be by
executive
edict trying to back in to buying votes in a midterm
election
sacks by the way?
Just on the politics
of that, I think this could potentially hurt them because to your
point, this is basically a
bailout of the woke professional class. It's the, it's the underemployed graduates of these
universities who
again, are members of the professional class. They majored in things that didn't increase their earnings potential.
Meanwhile, the majority of
The country is working class, something like 2/3
of the country is still working class,
meaning non college educated and they're
gonna have to pay for
this bailout in one way or
another. Either through higher taxes
or more deficit spending or more debt?
The burden of this bailout's
gonna fall on them. And why should they have to pay to play literally
like somebody working
in retail is paying for
somebody's graduate school degree in
creative writing or something
is completely and profoundly unfair
to the answer
to Freeburg question.
We actually know when executive
function fully matures and adults, it's
25 years old and that's when you can actually make
long term thinking. So
there is an argument that people should
not be allowed to take these
loans that
are not even
that you
can't get out of
or there should be some cap
on the amount of
loans you can take because
people at the age of
17, 18, 1920 are
absolutely not able to
make these decisions. There are
other programs as well that works. So in Canada I went to a school called the University of Waterloo
and Fantastic
Engineering School. The reason I went there and I did electrical engineering there is that they had a program where after the first year,
so the first year looks like
every other year at every other school.
Okay but you're
There for you know two semesters from September
to May. But
after that you
start working
And you alternate four months of work with four months of school and you get paid for that work. And what it allowed me to do
was graduate
with meaningfully less
debt. But it
also allowed me to graduate with a commercial skill set and I was
able to get a job
and in that moment actually I was working at a bank and I got profoundly lucky, which is, I worked for an individual and I was treating interest rate
derivatives
and I was learning to trade technology stocks on the side and this guy mike fisher, incredible human being
and I
Made in one year like 25 or 30,000
dollars for
him, He wrote me a check and he said, here you have $25,000 of student debt, go pay it off right now,
I'll let you cash out this
Whole book. I graduated with about 28,000 of debt, I had
about 8000,
I think I had a um somewhere
between
10 and 15,000, 10 and 20,000. And then I got my
first bonus check after my first
year of work after undergrad.
And I paid off all my
debt and it felt incredible,
incredible. It
was amazing when I paid
off my debt, I've never been in debt
since I
walked downstairs to the bank and I pay, I gave them the check and I endorsed it and I said, here's my student loan number
and I was like, oh my God,
I was free for the, it's like, it was an enormous sense of relief for me.
It was credit card debt I had accumulated on the
credit card cause I went to cal
I was like four grand a year to go to college. But but if,
if, if I didn't go to waterloo, I would have had double the debt because I wouldn't have had work. But then also like I think about all these
scenarios, I wouldn't have had
two years of work experience. I may not have gotten the job that I did at Bank of Montreal at the time, that may not have been able to give me a chance to meet mike fisher, all these things could have
happened. So you can't
rely on the luck of the butterfly effect so that you have a reasonable shot of building a good life, right?
So there are all these things
in universities that I think are really mismanaged today and they go and work against what is right in society.
So I'll give you another
example. The dean of the engineering school and the president of University of Waterloo was here
this week with me
and I asked them,
tell me about
these global rankings and they said, you know, it's just a really difficult game. They said if we wanted to compete to try to get high on the list,
we would
have to do the things
that would
undo all the things that made us great and unique in the first place and I was like, you know what I am such a huge supporter of this
school, please just
Continue to do what you're doing and I'm so proud that they have the strength to just stand on their own two ft but every other school is running this
shell game
of, you know, gerrymandering all of these statistics, trying to get high on
the list to trick some
parent to force their kids
to go to some
School to then graduate with $200,000 of debt to get a job that that doesn't
then give
them any line of sight to paying it off.
It is, I
don't think it's their kid's fault,
but you have to
reform the system. And I think the first thing you need to do is look inside these universities and hold these folks accountable.
I mean these incentive systems are just crazy. Um speaking about crazy, uh we
talked about Bill Lange
and his,
that's your transition,
that transition,
sorry, they can't all
be as elegant
and smooth.
Here's jake hell, he's looking at the agenda for
today and he sees
Bill Lange and he's
like, okay, how do I do this? How do I?
Crazy. Crazy. The linkages craziness, okay go no, no no no,
no, no, no. Hold on
the linkages, trillions and billions
and
trillions and trillion dollar mistakes
wang and his
CFO were arrested on Wednesday and charged
with racketeering,
wire fraud and
conspiracy, We talked
about this when it
happened. His firm
are
chewy
ghosts. I think it's
his
poorly named firm
and family office. We covered this in real
Time Back on Episode 28.
They famously lost
$20 billion dollars over two days when they
were margin called
back in March of
2021. He worked at Tiger management, yada yada
and it was at the
time reported that they were trading
billions of dollars at over
five X
leverage
according to the sec
complaint at its
peak, the firm was managing
36 billion With 100 and 60 billion of exposure, which is 4.5
times leverage,
but Archie
go so what however it's
pronounced started with only 1.5 billion in assets
in March
of 2020. So wang
Flipped 1.5
billion in capital into 160 billion of exposure in 12 months, essentially trading somewhere in the
Neighborhood of a 100-1
at its peak according to this complaint, um a bunch of banks have lost money Because they were supporting this. Credit Suisse lost 5.5 billion Morgan Stanley lost a billion ups 774 million. The new york times described it as quote orchestrating a stock manipulation scheme that
relied
on them masking
and concealing the
enormous risk they had taken.
The mafia had some
thoughts on this. I think so. First, I think
we should probably explain
how he did this, right? So
that's that's everybody's question is how did the banks let this
happen? Well, I think first it's
what's the mechanism.
So you know, there are ways
in capital markets
to take really extreme
bets this
way is called
what's called a total
return swap.
And so the
basic way that this works is
You have two people
on on each side of the trade.
And what you
basically say is let's agree on what's called the reference
asset. So I'll just use an example, let's just say
it's um, I think
Discovery was one of the companies
that they were trading. So
Discovery Communications,
let's look at, let's, that's the
reference asset that
stock
and what I'm
going to do is buy protection and what you're going to do is
um self
protection. And essentially what happens is
as
the stock goes
up and down, you're
going to net the difference between
these two people and when you do it
that way via a
derivative. So what
it, what it forces the person to do the bank in this case
is to go out and
buy the stock
okay.
Show that they are hedged in case the price goes up a
lot because they have to pay
that difference
in this case to Bill
huang. And if the price goes down,
Bill huang has to
pay that difference
back
to the
bank. So what happened is
that he went
to three different
banks morgan Stanley
Goldman Sachs and Credit
Suisse and effectively what he did
was he bought,
he he made these bets
across a handful of
names, but he did
it with so much
leverage that he ended
Up owning 60 or 70% of some of these companies.
And in March of last
year, when the stock market turned
over, um he owed them
enormous amounts of money,
so much so that
these banks had to unwind these trades, which caused further downdrafts in the stock and almost spilled over to the
broader stock market.
Jason that the numbers from the sec complaint are pretty crazy. As of March 31 of
2020
they had one
0.6 billion
invested
on a gross exposure
of 10.2
billion, which that what that means is they were able to go
and lever up this one
six billion to behave in
The market as if they had 10.2 billion By January one of 2021. So nine months
later They had 7.7 billion
dollars of invested capital. So they've done
really well, right, they made
70% on this 10
billion, but they leveled
that up again and so they had gross exposure of
$54 billion.
And then just
I think three months later, by
March 22nd,
They had $36 billion dollars
of invested capital, meaning they had
$36 billion dollars of cash.
This guy had taken one
six and spun it up 236 billion
in
in a year. But then he had leveled that up again and he had $160 billion dollars of gross
exposure and then the market
turned and he owed all this
money and so all these folks had
to get out of it, but
also alleged that he was trying to do short squeezes
on the stocks to try
to make them goose
even more. So there was a massive
manipulation because of his position size correct? Yes.
So this is what
happened, but then here's how it
is allowed to happen. So
if you try to do the same
thing in interest
rates, in the interest rates market
versus the equities market, it's not possible
why if I wanted to go
and buy a
credit default swap, effectively, think of
that as the same kind of thing he
did, but on the debt
of a company, on the debt of
discovery,
what
I would do is I would be able to
enter into that trade with the bank, but it
goes into a clearing house
and that
clearinghouses able to
tell all the banks
how much
risk is building up in the
system. And the reason we
implemented this clearing house was to
make sure coming out of the great
financial crisis, none
of that chaos ever happened again. But
we did not include the
equity markets in that
clearing house. And in the laws that regulated?
And so what
this is, is a very shadowy,
great part of the,
of the market that is poorly regulated.
That has
very little oversight. So what do the banks do the banks say to
you if you want to put this thing on, give me a
balance sheet. So I understand what the risk
is a piece
of paper, a report.
And I think what,
what they're alleging
is that
these guys lied
so that any individual bank
in this case, Goldman morgen and
Credit Suisse had no idea
because they kind of doctored these reports
to each other
and that's why that's
why all this risk built up in
the system,
it would be solved if you had a clearinghouse for equity derivatives the same way you have for interest rate derivatives. It is crazy to think that
somebody was doing
this and I thought
they would get away with it
and had been up
20 acts and the psychology
of these people, the madoffs of the world. I just find fascinating why
wouldn't he if he just
by the way we we talked
about how the three, the four of
us, we talked about
how the four of us are
Grinding to return to X. of our money in 10
Years. He's seven x.
Or 10 x to one
$.6 billion.
And it was not
enough. It's not enough people
have. I mean
what do you think the psychology of this is?
And that's what I'm trying to
figure out sacks. What's the psychology
of somebody who tries to
do this?
They're already a billionaire. They've already got their jet, they could go anywhere. They could have anything, they could buy any home, They could go on any vacation. Well that's? The thing I never understand
about these people is like
this has got to
be some crazy sociopathic
behavior Jekyll. Did you always want to jet? I just got a small business select on southwest when you started your career. What did you want
the next?
And that's what I want when you started, you wanted a house, right? And then you got the house and you wanted the home in Tahoe and then you or the home, you know the vacation home and then and then you wanted to do and then, I mean I don't know why this is confusing.
Well no,
but I don't want it enough to put my entire freedom
at risk or
to cheat. Apparently
this dude was a christian, I'll put that in quotes
because I don't, I mean
don't ran
ran bible study and stuff in the mornings. He lived in some modest house in Jersey
blah blah blah,
but you know, he
was a bit of a freaky deak.
What does that mean? I mean the guy could get, by the
way the dude was pinched
In 2012
for insider trading and had to pay a settlement and might
get back everybody's money that got pinched.
It's crazy
and it is what it is. You know you and your friends and I got pinched pinched pinched when you grew up in the streets, you know that is what happened to
this guy. I got pinched
the guy, a cheese, he didn't round, he ratted out his friends and he ratted out his friends. Now the CFO
got pinched to
flip them. This
is super deranged.
Speaking of the range transitions where we going, where are we going to do? Someone needs to take all of jake's health transitions from the last couple of shows and just put them together in a row. Just crazy deranged on Wednesday. The Department of homeland Security speaking of
billions
announced a disinformation governance board disinformation governance board. According to the announcement, the board will immediately immediately began focusing on misinformation aimed at
migrants
at the US mexican border. The board will be led by
disinformation
expert Nina. Thank you.
Its banquets. He
has research
Russian misinformation
tactics and online harassment. This is also the woman who sings
show tunes on
Tiktok this information, you should be running a disinformation board. You always have such a strong opinion and you have you have such a nose for what's Bs and what's not, here's what's
going on here. So first of all,
this woman claims to be an
expert in disinformation.
Let's evaluate that claim. She
was an active pusher of the Steele dossier
which turns out
is disinformation
for which people are now under indictment.
She
also was active
in trying to censor the hunter biden laptop story,
which as it now
turns out was not
disinformation. It was absolutely
true. As acknowledged
by the new york times the Washington post,
you would think that these blemishes on her record might
disqualify her from
being an expert on
disinformation. But actually in the view that people are hiring her, these are actually
qualifications because they
are not interested
in the truth. There is
the reason this department
is set up. And what they
mean by disinformation
is they have
hired her to push partisan
political points.
That's what's
going on here. That's what this information is. Now.
It used
to be that if you disagreed with somebody,
you just say, listen, I
disagree with you or maybe you're an idiot, whatever
you're wrong. But
now the way that these debates
are set up and the way they
work is
they don't just say you're
wrong or that's not
true. They try to label
used information so you can get you
censored.
And the point of hiring
this disinformation
czar is
is basically to
censor that is basically shut down the debate.
That that is basically the
whole point of this. You think
there's any timing here
with Ellen.
Yes, of course
it's it's
um well, it's it's there was a great tweet
about this conspiracy by the way, I don't think it's conspiracy theory. It's
there was a great tweet about this
that
that we live in a future
where it's like a mash up
of George
Orwell and Ayn rand because here you have,
you know, Elon
musk, the
heroic lone
entrepreneur trying to rescue freedom of
speech at the
same time, you have this Orwellian Ministry of
Truth being created
by the federal government. So, I
mean, no awareness of
naming.
Yeah, it's just bizarre. But
but the disturbing thing about
it is this information governance board
is such a dystopian
name. The
the the
thing about it that's a little bit scary here. I know you
play the video
of her doing
show tunes and it seems sort of silly. But the thing that's
scary is that this is under the
Homeland Security
Department
is that
they're it's it's the most
militarized department in our government. So it's really scary to put the Ministry
of Truth
under the department that has all
the soldiers of
Truth. It's not the
name of it, but it's
close, pretty darn close now now why is it there?
I'll tell you why
because this was built up to
there was a
a couple
of months ago is a news
story that we might have covered on the spot
where the
Homeland Security Department
redefined
disinformation
to
comprise. Uh
they they said it represented
an escalation of the terror threat level. So in other words, they
basically said
that disinformation
was tantamount to terrorism. Remember that when we talk about
that this
is the payoff to
that first, they
define, they basically defined the other side as being disinformation
of the debate as being
disinformation then they define
disinformation
as as basically terrorism.
Then they have the
Homeland uh Security Department which is supposed to be responsible terrorism, create this
Ministry of Truth. This is what's going
on here. It's really weird
just to remind everyone, there was concern in the last election.
I I'm going to play devil's advocate as I often find myself doing here,
that
just just to try and explain the world that that's the reason I often play
this role, because I'm trying to understand the world.
But you know, there was a real concern that, you know, the Russian government was
using, you
know, information
warfare and propaganda
through social media to influence
voting.
And um, and that that is considered a security threat to the integrity of our elections. Therefore, this is a homeland security issue. And there is a question mark, of course, that everyone has on how far they're going to go. Once you set this precedent, when would they ever stop in terms of quote, unquote policing information and policing? What's true and managing internal propaganda and internal media delivered to us by the government? That's the other side of the coin. But the primary side of the coin, the initial side, the initial
representation that I
think folks do have concerns around is how do
we keep foreign
actors from creating misinformation campaigns that go viral and influence elections and sex? I don't know if you think that that's a concern we should
or shouldn't have. But
how would you address it if you were the president and that was the the
challenge, you know, to like how do we stop that from
happening? Foreign
actors interfering in our
elections is
certainly a concern we should have.
It was actually
happening on a big scale or in a meaningful way. I mean, this is basically,
look, this is
basically a hoax, okay,
john Durham is
basically out there making indictments right now, proving the extent of the
spokes. It started with the
whole Steele dossier which was a piece of campaign
opposition research
that was
manufactured by
Hillary Clinton's campaign.
The lawyers
who basically produced it are under indictment
and that's where this
whole thing of Russian disinformation
came from.
And the only
proof for that thesis
Is that supposedly the Russians bought 100,000
dollars facebook
ads on
facebook. So I'm
not denying that that occurred. But
it was relatively
minor, was a drop
in the bucket of all the activity
going on around the world, to be clear to be clear.
That was just the ads
that were bought with with like credit cards that said like fsb on it like,
but who
facebook,
you probably,
you know, didn't count all
the number of credit cards that were
stolen. I'm pretty sure the Russians
are capable of stealing john smith's credit card and using that to
buy ads as well. So I
looked at those ads that you've seen
those ads, they were
ludicrous, they weren't gonna convince anybody of anything. I
mean, they had like
jesus
and the devil arm wrestling each other and the jesus figure was basically set and
the it was, you
know, it was just absurd. I mean, the
jesus figure was saying that they want
to be clear. It happened
and you've now stepped back your
position on like
it just wasn't that
scale to your opinion.
I
think, I think,
look, the the scale interference in the election was committed by Big
Tech. I mean, they
Censored the Hunter Biden Story two
weeks before the election.
It turns out that's a completely
true story that Hunter
biden has extensive business dealings
in
Ukraine, the country we are
now, but we are now deeply involved in a war
there
and that story, the
electorate had the right to take that
into account Big
Tech center, that
story. So there was a
reason for that. May I
respond to that just
to give people
like making
a very difficult decision. You have to remember
trump, asked Putin
onstage to
hack Hillary's
emails and they did, then
he asked the Ukraine
um
to take action against the
bidens or he wouldn't give them
support. He was impeached for that. So
if you
put yourself in the and I'm not saying twitter
made the right decision here,
but there was and there was
also sexual material, you know, people's nudes
which and hacked material
and nudes are against
the terms of service.
So
I think two things
happened concurrently.
One listen,
the people working at twitter or
98% liberal. They don't want Trump, they sort
of an existential threat.
And then to
they don't want to link to
hacked material. Oh
really? Well hold on
a second. Hold on. During the
whole Canadian trucker.
Let me finish this point
during that. I have to finish
my point the third point and then I'll
let you go. Is that in it? In addition to all that hunter biden
is completely a grifter go, okay, I agree with you on that
one. So
look during the whole Canadian trucker thing. Remember
when all the people who contributed to
those Canadian truckers, they got docs. I mean basically was a hacker who
leaked all the people who had
donated
and social networks were happy to print
all that information. So this idea
that they
censor hacked information is nonsense.
The
lives of Tiktok account just got docks by taylor Lorenz look
whether you think that was a good
idea or not. The
point is these principles are
invoked very selectively
when there's a story they want to
suppress. And the new york
times and the Washington post have both not come
out and said that the
laptop was real. It's been authenticated. The story was real and
this whole idea that it was disinformation
that was just invented.
I mean it was just
invented. Well no hacked. It wasn't that it was disinformation is that it was potentially hacked and you and trump, here's the thing trump set the stage for that
and
the the people on twitter
and facebook who
also made these decisions.
They were
Informed by three letter
agencies department of
Justice and FBI et cetera. Hey this is potentially hacked
material designed to interfere with the
election. Listen events and other Democratic party
operatives just made
up out of whole
cloth that the hunter biden story
was disinformation.
It was true. It's been
acknowledge is true.
The Washington post is is true. So hold on so it can improve.
No it's not about improving
it. Look well no, no I didn't hear my sentence. I think this is where social
media can improve which is
if they had to explain every one of these decisions
they make
in full in transparency. I think that's something Ellen
could bring to this
party which is if you're gonna block something we we need to know why and they'd never explain why and who made
the decision. And
I think that that transparency
would benefit situations like
this. If the doj or FBI told them this is hacked material, then they've got to go to the doj and said, hey you gotta give us cover here. If this is in fact hack material, you told us not
to print it.
We're not gonna print it. But it was just bizarre that
one publication got dinged like the new york
post, It didn't the oldest the oldest newspaper in America the oldest newspaper in America.
The bastion
of like it doesn't
matter, that's not for you to decide,
it's not for twitter
decides legitimate publication that had a true story and it was relevant to the election and
the american people should have been able to take that into account. And people like Nina
Jankiewicz, whatever our
new czar of the Ministry of
Truth, she
was out in the
forefront basically calling that story disinformation.
Meanwhile she's pushing
the Steele dossier which really wasn't
that story was
confirmed with biden have won.
I don't know, I don't know the answer to that, but the point is that
it should have been suppressed that was that was
election interference. Now Ellen came out this week and
specifically tweeted that that that was
basically a mistake that Jack
also said it was a bad, Jack said it was a mistake to
and Ellen repeated the same thing that
they shouldn't have done that. I
think there was an agree it's a bad
call in hindsight of
course. But in hindsight.
Right. But
what was the reaction to what Elon
said? He was accused
by virtue
of criticizing
the policy decision that twitter made that that was supposedly targeted harassment
of
the legal counsel at twitter who made the
decision who gets paid
$17 million dollars a
year to make those decisions.
Do you guys see this debate this happened last year, This this last week.
So the point is
that if you criticize somebody who's
on a certain side of the debate.
That's harassment, but he didn't even mention her by name and this is how
absurd this discourse
has gotten. Can I make a prediction? Yes. Collection
is great.
I think people
misunderstand
Elon's incentives for buying twitter.
So and I haven't talked about this, so
I'm just making a complete um subjective prediction.
I
think he's going to buy twitter, I think he's going to clean it up.
I think he's
probably going to generate
Something like a two
X on this. You know, we talked about how you know that's like a good terminal valuation in six or seven years that basically you know, puts that asset worth it around 100 billion
dollars.
In the meantime he's going to open source as much as possible. I think he's going to make it very difficult for misinformation and disinformation to get very far. He said he's going to authenticate every human being that uses the platform. He said all of these things publicly already.
And then here's the
master stroke and again this is just me speculating, I think he's going to donate
it into a
foundation and a trust and I think it will be an incredibly powerful competitive alternative to all these other for profit businesses because everything
you guys are talking about
is the incentives that get
perverted when you have to layer economics
inside the new york post inside the
Washington post
inside the new york times, the Wall Street Journal, everything
eventually
devolves to Clickbait to
hearsay to
doxing to whatever
can get you more
revenue.
But
if you can take it off the table and run these things as a public trust, you can actually win back a
bunch of confidence and
a lot of these edge cases go away
now you would say, why would
anybody do that? Well, I think the real answer is because then if
He, if he were to donate it into a foundation, he could get a $100 billion dollar
credit that he could use, you know, to offset
the gains when SpaceX
Starlink go
public, interesting,
very interesting theory. There you
go. Well, I I agree with everything except for the donation part because he's
raising 27
billion from private.
He'll pay the debt off. He'll own it
100% and
he'll pay people
a very fair living
wage and it'll attract people that want to seek out the truth that want to work in an a
political environment.
He's already said that 10% of the extremes,
you know, are are
both equally crazy. He's going to
force this thing to be
rational and predictable. I think it goes public again and and it goes to five times evaluation. Are
we going to be able to ask him these
questions in Miami?
Sure why not?
So let let me ask you guys a question, what would you do? Because a lot of people have pointed
out
in response to what has obviously
become a
very polarizing
set of discussions this week around what
should be censored, What should
be banned? What shouldn't etcetera? Elon's gonna
let bullying and hate
speech kind of proliferate other
people have said we
need to release, you know, the restrictions and let people say what they want to say. Freedom of speech has no bounds etcetera. What do you guys think about the
the argument that there there does need to be constraints and boundary
set around
things related to health
and safety
meaning if someone is making calls to violent
action, should
that be censored sex?
And how do you make
that interpretation? Because it
becomes a fuzzy gray
Interpretation and then separately, like when there are scientific papers that say one
thing and someone
says that's not true and says something else,
how do you kind of decide whether or not that should be
allowed or
censored on the platform? Because
I think those are two very
key
issues that we've got to take them separately.
Let's do violence
first sacks. There's
plenty of
precedent in law.
Just explain the violence because this was the whole trump argument, right? It was like he was inciting
violence was the argument
that was being made. But like
generally speaking,
is that an appropriate
form of
censorship on this
private platform.
And if so how do you set that
standard? Let's start
here with you hear this argument a lot, which
is that if Ellen brings free
speech back to
twitter, then we're gonna have all this horrible
content on there. You're
gonna have violence, You're going
to have racism, you're going to have
harassment. You have all you
know, all these bad things on
fraud. The truth of the matter is that it's really a straw
man argument because
what it's basically arguing is that free speech means anything
goes. But free speech does not mean
Anything goes there is we have 230 years a supreme court case law basically
um
discussing this
question of what speech is
protected and what's not and they're the Supreme
Court has ruled
That there's nine major
Categories of speech that are not protected by the 1st Amendment.
Why? Because that speech
is considered to be dangerous in one degree or another. So for
example, you
can't commit fraud like you know, the archer go sky or whatever and then say, well
that speech was protected by the
First Amendment, First Moment doesn't protect fraud. First Amendment doesn't protect incitement to commit violence or a crime. You know, it doesn't protect
fighting words.
So you could ban, you know, all ethnic or racial slurs
on these social networks
under the concept of fighting
words. So
I think if you actually
look at what I would do is I
instead of just making up
the content moderation policies as I went along. I would look at the people at the
cases where people been
wrestling with these decisions for decades
and I would create
a content moderation policy
inspired by
First Amendment case law
Where I would take these nine
categories of of sort of
dangerous
speech or harmful speech and I would operationalize those. So for example,
you can't defame
people, right? You know, the
first moment doesn't
protect you against
claims of defamation.
Would you make
people go to court though in order for them
to take it down?
Right? So this is where the word
operationalized really comes
in. It's not practical for a social
network to require a court level
burden of proof to prove defamation.
Right? So what I would
do is I would say that if you are a
person who claims to be defamed,
you can follow report on twitter
and provide the tweet and
provide,
you know, um some
explanation and
as long as it looks like a cultural claim of defamation meaning the person is
attacking you in a
way that seems out of bounds and potentially that could be taken down. You don't have to subject it to a jury trial or something like
that. So what I would do is I wouldn't, you
can't literally
impose First Amendment case
law, but I would use it as the basis
for defining a content
moderation policy. Can I just say something, I think one of one of the best things about being
your friend is sometimes you say stuff
that is so
powerfully smart and elegant because it's so simple basically what Saxe said for everybody
else because this is how he's
like the Prd for content moderation
has existed. It's called the
constitution. It's
just that nobody in
any of these companies has taken an
effort to actually try
to write code that maps to this
P. R. D. Where
the P. R. D. Is the constitution whose
rights have been established
for hundreds of years by PRD even product requirements document.
Yeah. Sorry. Yeah. Yeah. That's
what a product manager would use. Yeah. Yeah exactly. Instead of them
making this up at all
as they go along, I would look to the
categories of speech. The Supreme Court has already
ruled out the prg
Prg
Let's just do the health one sex.
So
there's a scientific paper that says
this drug
doesn't cure
covid and
then someone goes on twitter and says take this
drug it cures covid.
What's the what's your and I know you're not obviously of
constitutional
lawyer at this point in
your career, but how would you kind of
think about
um about that?
And and how how do you think
that that would ultimately
resolve in this
regulatory
framework? That's a debate
that should exist. I
mean I don't know why we need to suppress that debate. So if someone says
declarative lee on twitter, this drug will cure
Covid. Which
by the way the trends
and just to be clear by the way, you know the FDA
actually regulates claims like that on boxes and material
and in a commercial setting.
And if you're making
money off twitter and you're getting a lot of
followers and then you make
more money by putting out a
tweet that said but you're
not you're not making money off the
drug
so that the person is selling
the drug Roch, Roch
should never say that
right? So if someone went on twitter and they said take this drug, it cares covid but there's a sign
you're confusing facts and authority twitter is
riddled with people that
have zero authority that spit out what they think are facts, right? So I I think I think what you're
speaking to is something
very different which is if you're going to design a social
network, I've been
Part of helping to design one. So let me just give you my two cents on
this topic.
There are layers of
decision
making that need to go into an
algorithm to get to
a sense of rank. Okay. Rank means do we believe with some reasonable probability distribution in some probability distribution that this thing is worth showing to somebody else. And the way that
you get there is through multiple
layers. So there's obviously a layer where you can
get signal relative to the
authenticity of the person, an individual making the
claim, is it a
bot? Is it a real person?
Then there's a separate
layer which is how you know roughly accurate do we think this
is then there is
another layer which is is
this person believable
in making all of those
statements and my point is
there are different subsystems
you build for those things. He
has already said all these algorithms are going to be open sourced
and what you're talking
about is authority. You should allow
people to say stupid
things. It's not
illegal.
Yes. A person
can be on the street quarter saying
jesus is the son
of God and he will save
your soul. Sex doesn't
have to believe him.
And somebody can say
that on twitter. The
issue here is does
it trend? And
do you show it to people the algorithm
and if you fix those
problems then who cares
if a person says, hey listen, twitter has
an authority problem and a ranking problem. And the authority problem comes from the fact that there's all kinds of long tail non
human
individuals in the system.
So solve for
identity and this problem
can get easier
solved and solved for
trending and so if you guys were running twitter,
you would not put on these covid
19 warnings.
This is misinformation
and and and rely solely on
CDC guidance and
recommendations and FDA
approvals when it comes to treatments and
vaccines and risks and so
on. You would you would let anyone
say whatever they wanted.
I'm
not, I'm not arguing for the kids. I'm trying to get clarity here. He's just asking the question what
I would do is and not go to your
taxes. I would label
it and
I would, I wouldn't label
it right or wrong. I'd
say I'm
from Acton
is a
drug. Here's the Wikipedia. Hold on. Here's the Wikipedia page on Ivor Metal. Let's say there's a lot
of confusion about
Ivermectin, which there was, You could just put, anytime
anybody says the word of
ivermectin,
here's a sentence of what I've
done is, here's the Wikipedia
page, the C D C page, the UK government's page, Dhs whatever for more
information about this topic. So I just
wanted, I just wanted to learn more about, I want to disagree with what you're proposing because it is the topic to. Sure it was the one off
that then triggered
the ability for everyone to bifurcate
on their point of
view on what should or shouldn't be done as opposed to having a universal
standard that is universally
applied. That
doesn't speak specifically to just the covid
19 pandemic
or just I've ever met
in or just
what trump said or didn't
Say. But each one
of these things can and should be universally
standardized
and universally
communicated and then treated
with universal
standards
across everyone and
every topic
rather than have each of these breakouts where you've got someone on twitter scratching their heads saying this seems to be
an important topic.
Let's come in and
annotate it. Let's create a
classification for this and that's where everyone gets
riled up in my
opinion. I think if there was a
universal standard that was
universally applied without the
topic,
another good example. But
first of all nobody contradicted the CDC
more than the C. D. C. Itself. It
constantly it constantly
put out revisions of its old opinions.
First it said that Covid
was not spread human to human
then it obviously said that it
was it basically was against
mass and it was for
them and on and on and
on. It went okay.
The idea that
you cannot criticize your government or an agency of the government is
absurd. But that
is the type of censorship that was being the level of these
social networks is
that that basically they're preventing
us from criticizing
the so called experts.
That is
precisely the kind of censorship that should not exist on these networks.
That is precisely the
kind of debate
talked about it like the
problem with label information.
The problem with labeling is once again it's done selectively and the people at twitter basically
decide who they think
is right in a debate and they
basically want to act
as a referee
To raise the hand of one
of the participants in the debate,
raised their hand over their
head and declare them
the victor. Now
it's a lot better
to label than to just censor the other side's point
of view. But still it
is a form of
subsistence labeling I
described where and which
happens on our podcast
on Spotify where it says
here's the covid information center,
you know, for more information and they give a range of so if it's executed in that way, do you oppose
it? If there's like
a very confusing
public interest going on?
If if if you worked to
algorithmic lee post
related
stories or something like that and it was done in a completely
fair and speech neutral
way and it was just as
a feature of twitter
fine. But if you have
employees at twitter sitting around discussing issues and deciding who the winner is in various debates and then
putting their their thumb
on the scale to
tilt the debate towards those
people. That's not what they should be
doing now. You know, and that is
basically what they're doing with censorship.
If you
look again, let's let's let's go back to this this this topic of misinformation
because this is really
the crux of the
debate. Okay, once again, on the basis of First Amendment case, all you could remove
offensive
material on twitter
on the basis
that it is, you know, fighting words, it's a slur, it's harassment incitement to violence. You could it's fraud. Okay,
inauthentic that
the account is not who they purport to be. You remove all the
bots. So all
that content can get removed. So what is really left then it is basically this idea of misinformation. This
idea
that we are
Going to declare one
party the victor in
this debate and I
think that is what is so offensive about this ministry of Truth
that homeland Security is setting
up is what's so offensive about the censorship that twitter has been practicing. Which is they are trying to end the
debate. They're trying to say,
look this is the person with the on the side of truth
and that is not what they should be
doing. It's up to the marketplace to decide what the truth is. Alright there you have
it folks,
do you disagree with that? I I agree with you to your point, David,
I
do think in a situation where the public good and there's confusion in a situation sending
people to more
information isn't a bad idea.
I do think a lot of
this uh there were thumbs
on the scales and it
wasn't transparent what was happening. I think if you
add transparency. So I
think every time there's
an action that's taken it should say
agent number and what their agent number is,
took this action
on this tweet
for this reason
and then data scientists can look
at all the actions that
occur and then
say look we're
looking at this agent number and here's their managers agent number and here's
why they took down
this post.
You know that at least you could have a starting
point to figure out what's going on. We don't even have enough information to know what what thumbs are on what
scales if at all
or to what extent. And I would like to see
Transparency 1st. So we could have
a more informed decision and then sending
people to trusted information source is
a group of them isn't a bad idea I think. Yeah,
I mean, and so to your point,
you don't need to look to
a podcaster,
a social network for the government to find truth in the
world. You have to have a
process yourself. That's part
of what this podcast is.
It's for people to being a part of being an adult. Yes.
You have to come up with your own process of coming
to the truth that you could trust. Some people trust the
government agencies, some
people trust joe Rogan or a
podcast or this podcast.
Some people trust
the folk singer,
trust yourself.
That's the number one
thing you have to learn how to do as an adult
in life taking all
this information and make a
reasonable decision
to take. I've rejected or to not
take ivermectin is a perfect example. People said
there's no downside
to it. People have been taking this
drug forever and it's cheap.
And then another group of
people said, well you're taking
horse
medicine. It's like no, that's something
completely different. And
the whole conversation
became,
I felt very easy to
parse when you could
just do your own
research, do your own research and
talk to your doctor,
do your own research. But
you can't do your own research, if you're not
permitted to see everything. And um and you think about like with drugs,
think about how many
drugs Over the last 30, 40 years
have become the basis
for product liability lawsuits because
they had unintended side effects or consequences.
And they revised the use of those drugs or
drugs were taken off the
market if people weren't allowed
to question those
things. Because supposedly the experts
had ruled on
the issue and ended the debate,
how would we have gotten
a correction on that?
How we've gotten to the
truth? So just
because the experts say
something doesn't
mean that it's true. There's
there's pros and constantly we have kids getting tons of kids taking all kinds of Srs and
antidepressants
and all kinds of drugs. Parents have to make difficult decisions. Adults need to make difficult decisions.
Do they do this, do they
not? And by the way, there's no, we don't know. We're doing
large scale experimentations on the population in
real time with drugs. It is a
decision. You have to
do the pros and cons for
the medical establishment,
The medical establishment at one
in time thought it was a good idea
to lobotomized people like they were doing that is like a medical procedure.
So these people can be
wrong. You know this idea that we've arrived at the the end of history and we know the
truth truth.
No new
facts are being or
no new knowledge is being created for
Fox sake. I mean it's dangerous
assumption is red wine
good for you or bad for you because every
three or 4 fucking years coffee
and red wine are good for you or bad for you, depending on
the year. Well I saw, I
saw a longitudinal
study that just came out that said
there are no caloric benefits of intermittent
fasting. Now there's
a lot of people that would be
up in arms with that.
What are you supposed to do if if you know, maybe there's some value
to organ health, maybe there's some value to
managing your glycemic index.
But again, the point
is there are study upon
study, there's work going on
all the time. All these things
are in an area of
Gray. And so if all of a sudden you jump down one
person's throat and basically
become very judgy because you think that the
total bounded body of
knowledge is already being created, you are making an enormous mistake. I
mean, steve jobs thought he could
cure his own cancer. I mean,
intelligent people are free
to make bad decisions.
Was one of the most intelligent
talented people in the world who
by all accounts might have survived
longer if he had
trusted to this very
specific method of juicing. Um you know, there's a there's a certain sliver of folks, there's a really
incredible documentary actually on netflix if you
want to understand it. Of
people that went down this
path of juicing, they're trying to eliminate their micro nutrients.
And the
irony is
that the people
who are, I think some of the stupidest
people like that woman singing
show tunes like
these are the
people who are making these determinations over what is true and what is false
and what is labeled
information and what
we get to discuss,
its great bias. It's riddled with bias. You have to make your own decisions
in these cases and you know like
it's great to have smart
friends to have a dialogue
with.
It's a beautiful
dialogue. It's the beautiful thing
about being an american and working so hard to get to this country is the independence and the freedom to be your own self. I mean, why is that such a bad thing and why would anybody
want to give that up to a
nameless faceless blob in an
organization? Well and the,
and the response you get back from people is I'm not
abdicating my ability to think for myself
to this random woman singing
show tunes.
And then people say like, oh well the response I got
when I said just entrust yourself is like, well what about all these
bros who are listening to joe
Rogan and they're making
decisions on their health
according to joe Rogan, I'm like I'm like yeah, it's called personal responsibility. Like I'm not responsible for joe Rogan's listeners, you know the same, the
same person that told you that is probably micro dozing
and thinking Ayahuasca is a
solution to the problem they've ever had in fasting and micro juicing and from the
childhood trauma they had when
they didn't win there.
You know, soccer medal and
didn't get
into Harvard. So they're on high Ayahuasca
everyday. I mean, give me a break.
Yeah, nobody knows.
No, we we all know
so little.
That's what we know you live, You die at the end.
And we're all just trying to do our
best. And
so why don't we all
just try to have a reasonably decent
time and be nice to each
other. All right, everybody. It's been an amazing episode. We will see you in Miami, which
will be
absolutely fun and thrilling, sold
out. Our first
all incitement and last because I don't know
who the father is going to do this work
next time you will. You're doing an amazing job. Thank you. Bye bye bye boys. Well, let your winners ride. Brain man. David Sassoon. Open source is to the fans and they've just gone crazy with what? What? What? That is quite a dog taking place in your driveway. Oh, man.
We should all just get a room and just have one big, huge orgy because they're all just useless. It's like this like sexual attention. But they just need to release somehow. You know, your your your we need to get murky czar. Mhm